Stone Fox Capital's read: Buy companies with assets outside Australia in particular we've bought Freeport-McMoRan (FCX), Massey Energy (MEE), and US Steel (X). More on them later.
Our reasoning is that the tax will limit the supply especially from new projects in Australia with limited impact to demand. It clearly makes assets outside Australia more attractive. In the end, the announcements this weekend could go a long way to pressure the government to ratchet back the tax plans. It clearly places short term risk around projects.
BHP CEO Kloppers made it clear over the weekend that the resource tax slated to begin in 2012 could stop its expansion plans at the Olympic Dam project. The massive project is expected to cost as much as $16B. As he points out, if you've got competing projects and one provides lower taxes any company is going to chose that lower cost option. Or in most cases they'll chose no option.
- BHP Chief Executive Officer Marius Kloppers said expansion plans, including its Olympic Dam project, may be “very difficult” to approve. Kloppers said the new tax, to start in 2012, would stymie investment, spur companies to move offshore and threaten an industry that comprises 9 percent of the economy.
- “The uncertainty is in place, it would be very difficult to approve any of those projects,” Kloppers told the Australian Broadcasting Corp.’s Inside Business program yesterday. “We are not going to come out, particularly when it is very uncertain, to make blanket statements about things that affect livelihoods, communities, employees and so on.”
- The environmental impact statement on the Olympic Dam expansion is due by the end of 2011, Kloppers said. Expanding the mine would take 11 years and increase copper output almost fourfold to 750,000 metric tons a year, boost gold production eightfold and uranium by almost fivefold, according to BHP.
Peabody Energy (BTU) made it clear that the proposed resource tax was going to have a profound impact on Austrailian assets when they cut their offer for Macarthur coal by 6.5%.
- Peabody lowered its bid to A$15 a share, from A$16, after studying Macarthur’s finances and the tax was proposed, the St. Louis-based company said in a statement
In summary, all 3 companies had access to valuable assets in copper, met coal, and iron ore desperately needed in the expanding emerging markets. Previously the proximity of Australia to China gave them an advantage, but now as Australia places potential resources taxes that limit new mining expansion projects it makes external mines much more attractive. All 3 companies were already attractively priced, but now they should come more into focus from the investment world.